Valuation Flashcards
Capital Expenditure (CapEx)
The gross amount of cash that left the company for the purpose of investing into asset expansion and maintenance to uphold and increase operating activities and thereby operating income.
Cash is King
When evaluating investments/firm value, the investments capacity to pay out cash should be fundamental to its valuation.
- It is more difficult to “fake cash” than income”
- Evaluations must be based on cash figures
Market risk
- Cannot be reduced or diversified
- Born by all investors
- Needs to be rewarded
Idiosyncratic / firm-specific risk
Can be diversified and hence is not rewarded
Assumptions of the CAPM
- No transaction costs
- All assets are traded
- Investments are infinitely divisible
- No private information
> > > eliminate factors that cause investors to stop diversifying
Market portfolio
(under CAPM)
End limit of diversification is holding every traded risky asset in proportion to their market value.
beta = 0
(implication)
Asset does not move with the market: risk-free
Ivestors in the CAPM
In a market where the CAPM holds true, every investor is holding the same market portfolio but not the same portfolio in the market due to different risk profiles
Critisism of the CAPM
- Strong assumptions
- Difficult to find the market portfolio
- Limited statistical performance
- One-period model
Cost of Equity
Cost of equity can never be lower than the cost of debt.
Bond rates therefore provide a lower boundary for equity rates/cost of equity
Risk-free assets
- No default risk
- No uncertainty about investment rates
Unlevered beta
Unlevered beta ist a measure for asset risk
Evaluation of private/non-listed/pre-IPO firms
1) Calculate the unlevered betas for comparable companies (industry, similar business model, similar products,…) to understand/estimate “asset risk”
2) Re-lever the average of the unlevered betas
Disadvantages of NPV models
- Very resource intensive (time)
- Assumption-based (projected CF, estimated discount factor, cost of equity,…)
- Only partially based on market information
Enterprise Multiples
Evaluation of complete firm value
EV/Sales & EV/EBITDA
